Coty ECJ win provides a degree of comfort

Radu Bercan

Whilst the Coty win is good news for luxury, companies must beware of restrictions in distribution agreements which could breach competition law, say Trudy Feaster-Gee and Richard Butterworth of Walker Morris.

The European Court of Justice (ECJ)'s ruling in the Coty case that luxury goods suppliers should be able to prevent their products from being sold on third party online platforms such as Amazon or eBay in certain circumstances is good news for luxury companies in a number of respects. However, companies must still carefully examine their arrangements to make sure they do not breach competition law.

The dispute

The judgment relates to a dispute between US beauty products supplier Coty’s German subsidiary and German retailer Parfümerie Akzente, which refused to comply with a clause in Coty’s contracts requiring it not to supply its products on third party platforms. Coty brought an action in the German courts seeking an order to prevent Parfümerie Akzente from distributing Coty’s products via Amazon. The case was referred to the ECJ by the German court to rule on whether the clause was legal and enforceable under EU competition law.

Luxury image

In the judgment available here, the ECJ considered that luxury goods suppliers have an interest in preserving the luxury image of their goods and may wish legitimately to use selective distribution networks to help to preserve the quality of those goods. The ECJ stated that: “The quality of luxury goods is not simply the result of their material characteristics, but also of the allure and prestigious image which bestows on them an aura of luxury. That aura is an essential aspect of those goods”.

Selective distribution networks

The ECJ reviewed the relevant case law and considered that selective distribution networks are not necessarily caught by the prohibition on anticompetitive agreements in Article 101 TFEU where they meet three criteria: (1) the resellers are chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly and applied in a non-discriminatory fashion for all potential resellers; (2) the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use; and (3) the criteria laid down do not go beyond what is necessary.

Quality of luxury groups

For luxury goods in particular, the ECJ considered that a selective distribution network may be required in order to preserve the quality of those goods and to ensure that they are used properly. In terms of the specific restriction on selling on third party platforms such as Amazon and eBay, the ECJ considered that a restriction on the use of third party platforms, in the context of a selective distribution system for luxury goods, should not fall within the prohibition on anticompetitive agreements to the extent that the clause has the objective of preserving the luxury image of those goods, that it is laid down uniformly and not applied in a discriminatory fashion, and that it is proportionate in the light of the objective pursued.

Proportionate

The next stage in the proceedings will be for the case to be referred back to the German court to determine whether the online sales restriction was indeed proportionate along with the other criteria. Nevertheless, the ECJ carried out its own assessment and found that “subject to inquiries which it is for the referring court to make, such a prohibition appears to be lawful in relation to Article 101(1) TFEU” which will likely influence the German court.

Reaction to the judgement

Coty said in a statement: “Coty welcomes this decision which confirms that the character of luxury brands necessitates and justifies selective distribution, whatever the distribution channel.” The European Commission also welcomed the ECJ’s judgment stating that it “provides more clarity and legal certainty to market participants” and “confirmed the possibility for the luxury industry to operate certain selective distribution systems without infringing EU competition rules.” Andreas Mundt, the Head of the German Competition Authority, which has been active in tackling online sales bans, said, in a statement, that the judgment does not provide companies outside of the luxury space with “a carte blanche to impose blanket bans on selling via platforms”.

Restrictions in distribution agreements

The Coty case follows several cases in the UK in recent years in which the Competition and Markets Authority has investigated online sales restrictions such as mobility scooters, ping golf clubs, bathroom fittings, commercial catering and light fittings. Companies should take care not to include restrictions in their distribution agreements which may be found to breach competition law and lead to potential penalties including significant fines and damages actions. Although the Coty judgment will provide some comfort to luxury goods suppliers, companies should carefully review their agreements to ensure that any restrictions are proportionate and can be properly defended. Where a company relies on its selective distribution arrangements falling outside the scope of competition law, the circumstances must warrant the use of a selective system.